A COMPARATIVE STUDY OF ENVIRONMENTAL TAXES IN THE SOUTH AFRICAN CONTEXT
by
Annelie Laage
Submitted in partial fulfilment of the requirements for the degree MAGISTER COMMERCII in Taxation
in the
Faculty of Economic and Management Sciences University of Pretoria
Pretoria
Study leader: Mr.F. Opperman
September 2010
DEDICATION
To the four pillars of my life: my Father in Heaven, my husband and my parents. Without you, my life would fall apart.
I am eternally grateful for all the blessings God has undeservedly graced me with...I have lost count.
Paul, you are my everything. Thank you for your love, understanding, support, motivation and unfailing belief in me.
Vicky, for all the countless hours you have invested in me; your time, your prayers, your support, your advice, your ear and your love; thank you.
Dad, thank you for helping me keep things in perspective, teaching me the value of hard work, putting mind over matter and especially for being my reserve parachute.
We did it!
TABLE OF CONTENTS
DEDICATION ... i
LIST OF TABLES ... v
LIST OF FIGURES ... v
LIST OF ABBREVIATIONS ... vi
ABSTRACT ... vii
OPSOMMING ... ix
CHAPTER 1:INTRODUCTION... 1
1.1 Background ... 1
1.2 Problem statement ... 3
1.3 Purpose statement ... 4
1.4 Research objectives ... 6
1.5 Importance and benefits of the proposed study ... 7
1.6 Delimitations ... 9
1.7 Assumptions ... 10
1.8 Definitions of key terms ... 10
CHAPTER 2: THE KYOTO PROTOCOL ... 13
2.1 Background ... 13
2.1.1 Emissions trading known as the ‘carbon market’ or the ‘cap-and-trade system’ ... 14
2.1.2 Clean development mechanism (CDM) ... 14
2.1.3 Joint implementation ... 14
2.2 The Global perspective ... 14
2.3 The South African perspective ... 16
2.4 Conclusion ... 18
CHAPTER 3: EVALUATION OF DIFFERENT ECONOMIC MECHANISMS IN
REACHING THE KYOTO GOALS ... 22
3.1 Introduction: the status of the Kyoto Protocol ... 22
3.2 Advantages of tax mechanisms as opposed to quantitative limitation policy ... 24
3.3 The advantages of a tax system diametrically opposed to quantitative policies ... 26
3.4 Illustration of environmental responses to a taxes and credit system ... 27
3.5 Conclusion ... 28
CHAPTER 4: RECENT EXPERIENCE AND TRENDS IN ENVIRONMENTAL TAXES .... 30
4.1 Classifying environmental taxes and charges ... 30
4.1.1 Cost-covering charges ... 30
4.1.2 Incentive taxes ... 31
4.1.3 Revenue-raising taxes ... 31
4.2 Current tendencies and practices ... 32
4.2.1 Cost-covering charges: user charges ... 32
4.2.2 Cost-covering charges: earmarked charges ... 33
4.2.3 Optimal incentive taxes ... 34
4.2.4 Instrumental incentive taxes ... 34
4.2.5 Revenue-raising taxes ... 35
4.3 Conclusion ... 36
CHAPTER 5: CASE STUDY EXAMINING THE ENVIRONMENTAL TAX REGIMES IN MEXICO, MALAYSIA AND THE UNITED STATES OF AMERICA ... 37
5.1 Introduction ... 37
5.2 The role of environmental taxation in Mexico ... 37
5.2.1 Introduction ... 37
5.2.2 Environmental taxation in Mexico ... 38
5.2.3 Conclusion ... 40
5.3 The role of environmental taxation in Malaysia... 41
5.3.1 Introduction ... 41
5.3.2 Environmental taxation in Malaysia ... 41
5.3.3 Conclusion ... 46
5.4 The role of environmental taxation in the United States (US) ... 48
5.4.1 Introduction ... 48
5.4.2 Environmental taxation in the USA ... 48
5.4.3 Conclusion ... 50
5.5 Conclusion ... 50
CHAPTER 6: PROPOSED SOUTH AFRICAN ENVIRONMENTAL TAX SYSTEM ... 52
6.1 Introduction ... 52
6.2 South Africa’s current environmental tax system ... 53
6.2.1 Land rehabilitation ... 53
6.2.2 Environmental capital expenditure allowances ... 53
6.2.3 Environmental conservation and maintenance ... 54
6.2.4 Land declared as a national park or nature reserve ... 55
6.2.5 Plant and machinery used in the production of renewable energy ... 55
6.2.6 Wear and tear rates on solar energy units... 56
6.2.7 Carbon dioxide emissions tax ... 56
6.3 Proposed amendments to the current environmental tax system ... 57
6.3.1 Environmental capital expenditure allowances ... 59
6.3.2 Wear and tear rates on solar energy units... 59
6.3.3 Carbon dioxide emissions tax ... 60
6.3.4 Tax Concessions for investing in environment-friendly projects ... 60
6.3.5 Carbon tax ... 60
6.4 Conclusion ... 63
LIST OF REFERENCES ... 64
LIST OF TABLES
Table 5.1:Summary of Malaysian environmental taxation sections ... 42
Table 5.2:Summary of Malaysian environmental taxation sections relating to research and development ... 45
LIST OF FIGURES
Figure 3.1: Emission responses to tax and credit systems ... 27Figure 6.1: Comparison of the intensity of emissions ... 57
Figure 6.2: Illustration of the gap in emissions between emission scenarios ... 58
Figure 6.3: Average and marginal impact of various tax levels ... 61
LIST OF ABBREVIATIONS
Abbreviation Meaning
AUS $ Australian dollar
CDM clean development mechanism
CDP carbon disclosure project
CFC Chlorofluorocarbon
DEA Department of Environmental Affairs
EIA Energy Information Administration
EFR Environmental Fiscal Reform
ETR Ecological Tax Reform
ETS Emissions Trading Scheme
EU European Union
GDP gross domestic product
GHG greenhouse gases
IPCC Intergovernmental Panel on Climate Change
JI Joint Implementation
ITA Income Tax Act No 58 of 1962
LTMS long-term mitigation scenario
MDGs Millennium Development Goals
NERSA National Energy Regulator of South Africa
OECD Organisation of Economic Co-operation and
Development
SARS South African Revenue Service
UN United Nations
UNFCCC United Nations Framework Convention on
Climate Change
US United States (of America)
USD United States dollar
ABSTRACT
A COMPARATIVE STUDY OF ENVIRONMENTAL TAXES IN THE SOUTH AFRICAN CONTEXT
by
ANNELIE LAAGE
STUDY LEADER : MR. F. OPPERMAN DEPARTMENT : TAXATION
DEGREE : MAGISTER COMERCII (TAXATION)
The environment is in crisis, it has recently been reported that cars and trucks in the United States of America emit 314 million metric tons of carbon dioxide annually. To put it into perspective, that as much as would be released from burning all the coal in a freight train 80 467 kilometres long – enough to circle the world, twice (Science News, 2008).
The world’s response to the environmental crisis is through the ratification of the Kyoto Protocol. Currently, there are 190 parties (189 states and one regional economic integration organisation) to the Kyoto Protocol, of which the developed nations that are parties to the protocol account for 63.7% of global greenhouse gas emissions. The Kyoto Protocol is, however, proving to be inefficient in curbing greenhouse gas emissions due to the following reasons:
• there are currently no ramifications if agreed targets are not reached by member states;
• in its current form, the protocol only sets emission limits for the period ending 2012;
• the protocol subscribes mostly to quantitative measures as opposed to the introduction of a tax system to penalise emission producers.
Through extensive research conducted as part of this study, it was shown that a tax system is more efficient in ensuring a double dividend and achieving the Kyoto goals than a quantitative system as currently promoted under the Kyoto Protocol.
On the premise that a taxation system is preferable, this study sought to understand the current trends in environmental taxes and combined the available research in a comprehensive environmental tax matrix. The matrix of the various environmental taxes clearly distinguished between the incentive or revenue-raising functions of a tax and the main uses of the revenues. Each category was clearly illustrated through examples of its application based on extensive research.
The study further sought to demonstrate the practical application of environmental tax systems through an analysis of the environmental tax systems of Mexico, Malaysia and the United States, or sections in their tax law, dealing specifically with environmental- related tax matters.
Lastly, the research culminated in a review of the current environmental tax regime followed in South Africa in terms of normal income tax ,and proposed various alternatives, which can be considered for introduction by the South African Revenue Service.
Based on the literature reviewed the study concluded that a tax system is preferable to a quantitative system in order to limit GHG emissions. The various environmental taxes were investigated by taking into account an environmental tax matrix as well as experience gained from other countries in order to support, amongst other recommendations, the establishment of a carbon tax system in South Africa.
OPSOMMING
‘’N VERGELYKENDE STUDIE VAN OMGEWINGSBELASTING IN DIE SUID-AFRIKAANSE KONTEKS
deur
ANNELIE LAAGE
STUDIELEIER : MNR. F. OPPERMAN DEPARTEMENT : BELASTING
GRAAD : MAGISTER COMERCII (BELASTING)
Die omgewing is in ’n krisis, daar is onlangs berig dat voertuie in die Verenigde State van Amerika jaarliks verantwoordelik is vir 314 miljoen metrieke ton koolstofdioksied- besoedeling. Om dit in perspektief te plaas, dit is die koolstofdioksied wat vrygestel sou word as ‘’n 80 467 kilometer vragtrein vol steenkool verbrand sou word. Hierdie trein sou lank genoeg wees om twee maal om die aarde te strek (Science News, 2008).
Die wêreld se reaksie op die omgewingskrisis is deur die bekragtiging van die Kyoto- protokol. Daar is tans 190 partye tot die protokol (189 lande en een ekonomiese integrasie-organisasie). Sommige van die ontwikkelde lande wat lede van die protokol is verantwoordelik vir 63.7% van wêreldwye kweekhuisgasbesoedeling.
Die Kyoto-protokol is egter nie in staat om kweekhuisgasbesoedeling teë te werk nie om die volgende redes:
• daar is tans geen strafmaatreëls indien doelwitte deur deelnemende lande nie bereik word nie;
• in sy huidige vorm stel die protokol slegs beperkings op besoedeling tot 2012;
• die protokol onderskryf meestal kwantitatiewe beginsels in teenstelling met die voorstel van‘’n belastingstelsel wat die belastinglas op die bron van die besoedeling plaas.
Daar word aan die hand van die uitgebreide ondersoek, wat as deel van hierdie studie onderneem is, getoon dat ’n belastingstelsel ’n doeltreffender manier is om‘’n dubbel-
dividend te verseker ter bereiking van die Kyotodoelwitte in teenstelling met die huidige kwantitatiewe beginsels wat tans deur die protokol onderskryf word.
In die veronderstelling dat ’n omgewingsbelasting die voordeligste opsie is om te volg, bied hierdie studie meer inligting oor die huidige tendense in omgewingsbelasting en kombineer die beskikbare inligting in hierdie verband in ’n omgewingsbelasting-matriks. Die matriks klassifiseer die verskillende soorte omgewings-belasting in die voordeel of inkomste- genererende funksie van ’n belasting en die hoofgebruike van die inkomstes. Elke kategorie word duidelik geïllustreer deur toegepaste voorbeelde wat gegrond is op deeglike ondersoek.
Verder het die studie die volgende ondersoek: die praktiese toepassing van omgewingbelastingstelsels deur ’n analise van die Mexikaanse, Maleise en Amerikaanse omgewingsbelastingstelsels, of gedeeltes van hul belastingwette wat spesifiek verband hou met omgewingsbelastingsake.
Laastens het die studie gekyk na die huidige belastingstelsel in Suid-Afrika in die lig van omgewingsbelastingsake en stel alternatiewe voor vir die huidige belastingstelsel wat deur die Suid-Afrikaanse Inkomstediens oorweeg kan word.
Die studie het bevind dat ’n belastingstelsel meer gunstig is as ’n kwantitatiewe stelsel ten einde kweekhuisgasse te beperk. Die verskeie omgewingsbelasting opsies is ondersoek deur die omgewingsbelasting-matriks sowel as ervaring van ander lande te bestudeer.
Hierdie studie het bevind dat, tesame met ander moontlike wysigings van die huidige Suid- Afrikaanse belastingstelsel, ’n koolstof-belasting in die Suid-Afrikaanse konteks oorweeg moet word.
CHAPTER 1 INTRODUCTION
1.1 BACKGROUND
Eskom, South Africa’s state-owned electricity provider, has recently come under fire following its demand of three price increases of 45% per year to fund its power station building programme. Its regulator ,the National Energy Regulator of South Africa (Nersa), finally consented to three consecutive increases of around 25% each.
This will lead to an effective doubling of South Africa’s electricity price over three years.
The question remains: will a unilateral increase in tariffs be the best way to go for the South African economy as a whole and specifically, should other means of ensuring the achievement of environmental goals not be investigated? Foreign investors are dissuaded from investing in a country that is proving less and less competitive in terms of labour cost, energy prices, political instability and unfavourable labour practices.
There are many questions of great concern to the South African taxpayer such as:
should alternative methods of deriving much-needed income not be considered by the fiscus? Should Eskom not strive to employ some out-of-the-box thinking to ensure that the burden of a rate increase is borne more equitably? Should Eskom not be called to task about pumping millions of tons of carbon dioxide into the atmosphere on a daily basis because of South Africa’s archaic fossil fuel-intensive energy generation?
The decisions made by the South African Government concerning environmental taxes during this time of increased focus on global environmental issues are therefore relevant and important.
There is a means by which much-needed revenue can be channelled to the fiscus in an equitable manner while working towards solving South Africa’s present-day ecological conundrum at the same time. The answer comes in the form of environmental taxes.
Parry recently raised the debate in literature on the likely economic and social impacts of different types of environmental taxes and he placed specific focus on determining the effectiveness of these taxes to improve the environmental externalities, investigating equity concerns as well as potential market distortion caused by the environmental tax system in Scrimgeour, Oxley & Fatai, 2005:1439.
The Kyoto Protocol and more recently the UN Climate Talks in Copenhagen have added force to the debate and revealed the need for empirical analysis to assist policy-makers in making important decisions as supported by Pan and Lanza (Scrimgeour, Oxley, & Fatai, 2005:1439).
The need for empirical analysis has also generated a vast amount of literature relating to the study of economic and environmental issues in relation to the Kyoto Protocol as well as the Copenhagen talks.
What these studies lack is to explore options of maximising society welfare while simultaneously minimising greenhouse gas (GHG) emissions and the likely cost of achieving such a feat. Although this was explored in more detail in the New Zealand context (Scrimgeour et al., 2005), indicating the impact of alternative carbon, energy and petroleum taxes on the New Zealand economy and the competitiveness of the energy-intensive industy sector, no such comparative study has to date been performed in the South African context.
The status of the Kyoto Protocol in South Africa as well as alternative means of achieving environmental goals by comparing carbon credit trading (also referred to as a quantitative system) and environmental taxes have also not been reviewed in current literature.
Amundsen and Schob (1999:311) investigated the placement of the tax burden on resource owners and the correlating effect thereof on the international distribution of wealth. The study showed that the solution for small countries who do not co-ordinate their national environmental policies is to impose a time-variant Pigovian tax to ensure the change in international distribution of income while still resulting in Pareto optimality. The authors did, however, not propose the best-suited type of tax and again this study did not focus on the particular set of circumstances in South Africa.
This study also did not investigate the various types of environmental taxes by looking at their classification in an attempt to understand the specific goal of the various tax types.
In Sebitosi and Pillay (2008:2513), the South African environmental policy and power sector was investigated in more detail with the authors painting a bleak picture of South Africa’s future with continued envronmental degradation and intermittent power supplies due to the country’s energy-intensive economy.
Sebitosi and Pillay (2008) do, however, not propose a solution to avoid such a cynical outcome and do not explore the potential that environmental taxes hold in this context.
1.2 PROBLEM STATEMENT
Despite at least two decades of various articles and books being published on the topic of environmental reform, most studies in the field of environmental taxes have focused on the theoretical implementation of environmental taxes and on the environmental and tax burdens placed by authorities, mostly using the examples set by the so-called eco-leaders being Denmark, the Netherlands, Norway and Sweden.
Sebitosi and Pillay (2008:2516) argue strongly that a critical factor that South Africa can no longer afford to ignore is the prospect of tighter international environmental regulations. This can come in various guises as shown by Ellis (2008) in terms of
‘food miles’ where African agricultural exports to Europe are quickly becoming a target of debate. If South Africa envisions continuing trade with the rest of the global
community, the issue of carbon emissions primarily related to the exportation of such products will become increasingly relevant.
Sebitosi and Pillay (2008:2516) predict that in future manufacturing with power from untaxed GHG emission plants might be viewed as an industrial subsidy of local production. South African competitiveness in the light of global subsidisation protocols observed in international trade agreements would be adversely affected by such a stance.
The potential that environmental taxes hold in a South African context has not been investigated and is becoming increasingly important. Consequently, this study seeks to firstly understand South Africa’s obligations in terms of the Kyoto Protocol in order to establish the for environmental discussion in the context of environmental taxes.
The study will then investigate the various environmental tax regimes and provide a clear picture of the current environmental taxes available worldwide based on an established classification methodology. The practical application of these taxes will then be investigated through a brief analysis of the environmental taxes applied in Mexico, Malaysia and the United States (US). Lastly, the study will investigate the current and potential environmental taxes, which could alleviate the financial burden placed on regular South Africans while obtaining the added benefit of environmental conservation and conforming to increasing international pressure placed on ‘going green’ – the double dividend objective.
1.3 PURPOSE STATEMENT
The main purpose of this study is to understand the boundaries as set by the Kyoto Protocol for South Africa to operate in. It is important to understand global trends in analysing South Africa’s situation as this research will establish the measure of importance being placed globally on achieving certain environmental goals.
There is much speculation currently in the media on whether a quantitative limitation strategy (a so-called cap-and-trade system) or a taxing system would be more
effective in South Africa (Temkin, 2006:2). This study will seek to establish the most beneficial system based on a review of available literature.
The various taxation alternatives are largely unknown, especially because South Africa is still in its infancy in applying an environmental tax regime. Consequently, this study will examine the current environmental tax trends by using a classification matrix supported by the appropriate literature.
The interaction between the various taxes available under the matrix will then be expanded on through an investigation into the green tax regimes of other countries.
The study will then seek to understand the current South African environmental tax regime and propose amendments to the current tax system largely through the introduction of carbon tax to achieve the double dividend in a South African context.
Van der Merwe (2010:22) remarks that ‘green taxes’ have an impact on the cost of doing business. This, together with the drive to improve the global carbon footprint, makes it a key business risk for businesses not to invest time and money to quantify and reduce their carbon footprint.
South Africa has recently introduced a plastic bag levy with the aim of collecting funds for a national recycling programme and has been partly successful in curbing plastic bag use and waste. This levy has been placed squarely on the consumer.
From 1 October 2009 energy-hungry incandescent light bulbs became subject to an environmental levy and from 1 September 2010 emissions taxes charged on newly sold vehicles have become a reality. The tax burden is therefore being placed on the consumer.
The message is clear: the consumer has a choice. If the consumer does not bring his/her own bag to do grocery shopping, he/she would need to pay a levy for the luxury of not recycling old bags. If the consumer wants the luxury of using a lightbulb of choice, the consumer should be willing to pay a premium for exercising his/her right to choose.
But what about electricity? The consumer can be more economical in his/her electricity usage, however, the use of electricity in business and at home is a crucial element of any developing country. There are very few alternatives available to the consumer for other suppliers of electricity and as Bisseker states (2009:34) Eskom is the main decision-maker of South Africa’s new electricity master plan, which leaves little room for private sector involvement in the power generation field and also does not allow for renewable energy plans.
1.4 RESEARCH OBJECTIVES
This study will be guided by the following research objectives:
• to understand the boundaries as set by the Kyoto Protocol and what South Africa’s responsibilities are in terms of the protocol. It is important to understand global trends in analysing South Africa’s situation as this research will establish the measure of importance that is placed globally on achieving certain environmental goals and the potential repercussions if these goals are not achieved;
• to evaluate different economic mechanisms, which have been developed to reach the Kyoto goals, including a critical analysis of a tax mechanism as opposed to a quantitative limitation policy (cap-and-trade system). The difference between these two systems will also be diagrammatically represented and the study will indicate the preferred approach to ensure that double dividends are achieved.
Currently, two main schools of thought abound with some believing that a cap- and-trade system is optimal for reaching environmental goals, whereas others favour a tax system;
• to examine the current trends in environmental taxes by differentiating between the various systems based on an accepted classification matrix;
• to analyse the environmental taxes imposed in Mexico, Malaysia and the United States to indicate how these tax systems currently function and to clearly illustrate the interaction between the various tax sections;
• to analyse South Africa’s current income tax regime with regard to environmental taxes and to propose certain improvements in the environmental tax system, which could be applied to the South African context.
1.5 IMPORTANCE AND BENEFITS OF THE PROPOSED STUDY
This study explores the knowledge gaps that exist currently in the academic world as none of the studies to date have focused on South Africa’s context exclusively.
The study seeks to understand South Africa’s role in the global fight against GHG emissions and what limitations (if any) the Kyoto Protocol place on South Africa.
There is much debate, especially in the media, on whether a cap-and-trade system would be preferable to an environmental tax system. Tax and environmental specialists disagree to a large extent on the preferred approach. The relative benefits of each respective system will be investigated and through a diagrammatic representation the two systems’ efficacy in dealing with ecological challenges will be compared.
Once the study has indicated, through an analysis of available literature, what the most suitable system is, the knowledge gaps of the options, which are available in terms of environmental taxes, will be explored. The study will provide a matrix of environmental taxes in general in order to serve as a classification system of the various tax alternatives.
The theoretical knowledge will then be investigated through an analysis of the practical application of environmental tax systems in three other countries in a bid to understand the interaction of various taxes in a real-life scenario.
The final benefit of the study is to explain the current environmental taxes through an examination of the current Income Tax Act No 58 of 1962 (ITA) sections dealing with environmental taxes. Even among taxation specialists there appears to be some confusion as to the tax allowances/incentives provided in terms of the ITA in the South African context. Dermot Gaffney, head of indirect taxes at advisory and
auditing firm KPMG, was recently quoted in a newspaper article as stating that “in South Africa there are no environmental taxes” (Pile, 2008:55). Gaffney did, however, not take into effect the current tax allowances available in the ITA as well as the environmental taxes imposed in terms of the Customs and Excise Act (1964). This goes to illustrate the importance of expanding on these sections in order to decrease the knowledge gap in the market on environmental tax matters.
The study will also provide some insight into potential section amendments and new taxes, which might be introduced in due course.
The Kyoto Protocol and the recent UN talks in Copenhagen will be investigated in more detail in the following chapter in order to put the South African situation in a global context and to demonstrate South Africa’s agreed responsibilities in terms of these global treaties.
This will be followed by a discussion of the economic mechanisms that were introduced globally. These mechanisms were introduced to achieve environmental reform and the study will illustrate, based on both a review of the available literature as well as diagrammatical representation, the optimal alternative. Following from the establishment of the optimal mechanism, the current ecological tax trends will be explored first to set the scene for the various country applications.
Through the analysis of the tax regimes in a selected few countries, a South African solution will be proposed after investigating the current income tax relief measures currently available in terms of the ITA.
This study will be to the benefit of any individual that might seek to understand the options available under an environmental tax regime instead of a unilateral increase in rates.
Through investigating the benefits of an environmental tax regime, this study seeks to fill the knowledge gap currently in literature as no previous study focused on the unique South African perspective and current tax regime regarding environmental taxes.
1.6 DELIMITATIONS
The proposed study has several delimitations related to the context, constructs and theoretical perspectives of the study. Firstly, it will be limited to the South African context with specific emphasis on the South African tax, ecological and economic environment. As such, the study does not seek to explore alternatives applicable to other countries or economies.
Secondly, the study will probably indicate that a carbon credit system is not the optimal solution and therefore will not focus on the implementation of a carbon credit system and will not investigate the economic, ecological or tax implications of such a system in detail.
The study will not cover the analysis of existing taxes and excise duties that were not imposed for environmental reasons, such as those to maintain stockpiles of fuel.
This study is limited to the analysis of environmental taxes in Mexico and Malaysia due to both countries being extremely wealthy in natural resources and being developing countries. Although potential tax systems in European Union (EU) countries are investigated in broad terms, this study does not seek to specifically focus on these countries as the particular economic situation of these countries differ from that of a developing country. A brief investigation into the US tax environment is provided due to the US’s ratification status of the Kyoto Protocol.
The primary objective of the study is a focus on environmental taxes in a normal income tax context. Therefore the study will not focus on the environmental taxes currently imposed under the Customs and Excise Act (1964), such as the customs and excise levy on fuel, ad valorem excise duties on motor vehicles, air passenger departure tax and environmental levies on plastic bags, electricity from non- renewable sources and filament light bulbs.
1.7 ASSUMPTIONS
This study is based on the assumption that the environmental tax recommendations investigated are the most appropriate in the South African context. Although the study is not exhaustive in its analysis of these tax regimes, it is assumed that the analysis provides a sound basis for potential tax regimes to be employed in South Africa.
It is furthermore assumed that businesses would respond to the proposed environmental taxes by employing sound business principles in order to strive to alleviate their additional tax burden and seek more ecologically friendly means of pursuing their business objectives.
In this manner, environmental taxes should not be seen as a deterrent for the growth of a business but rather as an incentive to pursue cleaner, greener commodity production.
1.8 DEFINITIONS OF KEY TERMS
This study also involves a number of key concepts, which had to be defined due to the technical nature of the research. The key definitions are listed below.
Act means the Income Tax Act (58/1962).
Approved research company is defined by Ansari (2007:72) as an institute, including a company licensed under Section 24 of the Malaysian Companies Act (1965).
Contract research and development company is defined by Ansari (2007:72) as a company which provides research and development services in Malaysia only to a company other than to a related company.
Environmental fiscal reform is defined by the Organisation of Economic Co-operation and Development (OECD) in Speck & Datta, 2009:808 as “a range of taxation and
pricing measures which can raise fiscal revenues while furthering environmental goals”.
Environmental treatment and recycling asset is defined in section 37B of the ITA as any air, water, and solid waste treatment and recycling plant or pollution control and monitoring equipment (as well as any improvement thereto) if the plant or equipment is utilised in the taxpayer’s trade in an ancillary process to any process of manufacture or similar process and is required by any South African law for purposes of complying with measures that protect the environment.
Environmental waste disposal asset is defined in Section 37B of the ITA as any water, air and solid waste disposal site, dam, dump, reservoir or other similar structure or any improvement thereto if the structure is of a permanent nature, the plant or equipment is utilised in the taxpayer’s trade in an ancillary process to any process of manufacture or similar process and is required by any South African law for purposes of complying with measures that protect the environment.
Global public goods is defined by Nordhaus (2005:2) as public goods whose influences are felt globally as opposed to only in one country, town or nation. He further explains that what make these economic issues unique is the fact that there are only weak economic and political mechanisms to resolve these issues efficiently and effectively. Examples of global public goods are climate change, the threat of avian flu, the decline of many ocean fisheries and transanational terrorism.
Greenhouse gas is defined as carbon dioxide, methane, nitrous oxide, hydroflourocarbons, perfluorocarbons and sulphur hexafluoride and it is widely held that these gases increase the temperature of the Earth’s atmosphere.
Kyoto Protocol is defined by the United Nations Framework Convention on Climate Change (UNFCCC) as an international agreement which sets binding targets for 37 industrialised countries and the European community for reducing GHG emissions.
The protocol was adopted in Kyoto, Japan on 11 December 1997 and came in force on 16 February 2005 (UNFCCC, 2010).
Research and development companies is defined by Ansari (2007:72) as companies which provide research and development in Malaysia to both related companies and other companies.
CHAPTER 2
THE KYOTO PROTOCOL
2.1 BACKGROUND
The history of the Kyoto Protocol is described on the EIA website (2010). The Intergovernmental Panel on Climate Change (IPCC) was established in 1988 to assess the available information on climate change as it had been hypothesised over a number of years that GHGs could cause an increase in the Earth’s temperature, which may lead to changes in the global climate. The UN adopted a Framework Convention on Climate Change (UNFCCC) in 1992 and the signatories agreed to formulate programmes to mitigate climate change and developed countries agreed to implement means of reducing emissions compared with their 1990 levels of emissions.
In 1997, representatives from more than 160 countries met in Kyoto, Japan to negotiate binding limits on greenhouse gas emissions for developed nations.
Following on this, the Kyoto Protocol was established, setting emission targets for each of the participating developed countries.The targets were, for example, an 8%
reduction for the European Union, a 7% reduction for the US and an allowed increase of 10% for Iceland. These targets, if accepted by participating countries, would need to be reached by 2012.
The UNFCCC (2010) explains that the protocol recognises that developed countries are principally responsible for the high GHG emissions, which are experienced globally in the atmosphere and therefore it places a heavier burden on developed countries under the auspices of “common but differentiated responsibilities”.
The treaty sets certain targets for countries, which have to be achieved through national measures. The protocol offers an additional means for countries to meet their targets by way of market-based mechanisms, which is described in more detail below: These mechanisms are described in more detail below:
2.1.1 Emissions trading known as the ‘carbon market’ or the ‘cap-and-trade system’
The EIA website (2010) in its Energy Outlook 1998 states that there may be 165 metric tons of carbon permits available from the developed countries of the former Soviet Union in 2010. This is because GHG emissions in 2010 for those countries are expected to be 165 metric tons below the levels in 1990 due to the economic decline that has occurred in the region since 1990. These carbon credits can be traded on international markets; and procedures, rules and regulations for trading these credits are to be agreed between member countries.
2.1.2 Clean development mechanism (CDM)
This mechanism is available to developed countries, which reduce developing countries’ emissions; and credits can be earned by the developed countries for these initiatives. Ferreira (2009:12) explains that companies, which cannot meet their Kyoto targets by increasing their energy efficiency, can buy set-off certificates from other projects (such as wind farms), which create carbon credits.
2.1.3 Joint implementation
This mechanism allows joint projects between developed countries where one country can earn emission credits through the reduction of emissions in another developed country.
Currently, there are 190 parties (189 states and one regional economic integration organisation) to the Kyoto Protocol, of which the developed nations that are parties to the protocol account for 63.7% of global GHG emissions.
2.2 THE GLOBAL PERSPECTIVE
Kahn and Franceschi (2006:778) are of the opinion that the Kyoto Protocol represents an initial step for working towards a solution for global climate change.
The Kyoto Protocol on its own will not lead to the decline in the atmospheric concentrations of GHGs mostly due to the fact that emissions of developing countries are not dealt with stringently in the protocol.
According to the IPCC Synthesis report (Kahn and Franceschi, 2006:779), the stabilisation of concentrations of carbon dioxide needs to be reduced to the levels experienced in 1990 within several decades in order to limit the temperature change to 2 degrees Celcius and a sea level rise of 0.3 metres by 2100. Khan and Franceschi (2006) are of the opinion that the Kyoto Protocol alone cannot achieve this and recommend the implementation of an international system based on per unit carbon taxes.
The first reason for their dire outlook is due to the fact that, in terms of the protocol, Annex I countries (OECD countries and formerly communist Europe) are required to reduce their emissions to 6% below the 1990 levels by 2010. No limits are, however, placed on Annex II countries (developing countries such as China, India, Brazil and Mexico); and it has been projected that, if these four countries embarked on a development path that results in the same per capita emissions as the United States, the emissions of these four countries alone would exceed the wordwide emissions recorded in 2000.
The second reason why Khan and Franceschi (2006) assert that the Kyoto Protocol in itself cannot achieve the environmental goals is that there are no limits set beyond the proposed limits of the protocol. For an emission reduction protocol to be succesful, the increases in emissions from the developing countries have to be slowed down and the decrease in emissions by developed countries has to be increased beyond the levels stipulated by the Kyoto Protocol.
Mason (2009:8) reports that the US, which has never ratified the Kyoto Protocol, pledged a 17% reduction of its GHG emissions by 2020 (against a 2006 baseline) at the UN climate change meeting in Copenhagen, with China committing itself to cut the output of carbon per unit of gross domestic product by 40 - 45% by 2020, compared with levels experienced in 2005 (Business Day, 2009a:7). This is quite an ambitious target for China, especially when it is considered that coal accounts for
69% of primary energy in China, which is 42% higher than the world’s average (Sunday Independent, 2009:8). Due to the fact that the US uses a 2006 baseline to determine its projected reduction, compared with a 1990 baseline (used in the Kyoto Protocol), the US has only committed itself to a 3% reduction against a 1990 baseline.
The US’s pledge also falls far short of India, which recently committed itself to reducing its carbon emissions by 20 - 25% by 2020. Measures to achieve this proposed reduction include a mandatory fuel efficiency standard for all vehicles by 2011 and a building code to ensure that at least 50% of coal plants built use clean- coal technology where the carbon emissions are trapped underground as opposed to being dispersed into the atmosphere (Business Day., 2009b:8).
The US’s failings are, however, nothing compared with the failings of Canada, whose government announced in 2006 that it was abandoning its targets to cut GHGs under the Kyoto Protocol altogether.
Canada is the only country which had ratified the treaty and then abandoned its targets. As the treaty does not have any legal force but relies solely on the goodwill of the member countries there have been no repercussions to Canada for breaking its ratification other than potentially accepting punitive future obligations if its targets are not achieved (Monbiot, 2009:17). Canada initially commited itself to a reduction in GHG emissions of 6% between 1990 and 2012, instead their emissions rose by 26%.
2.3 THE SOUTH AFRICAN PERSPECTIVE
South Africa is classified as an Annex II country and as such, no limits are placed on South African GHG emissions. South Africa ratified the UN Framework Convention on Climate Change and its Kyoto Protocol and may continue without carbon caps until 2012.
Estimations are that South Africa’s GHG emissions rank among the top 20 worldwide, the country’s estimated contribution to global emissions is reported to be
1.8% and South Africa is responsible for 42% of Africa’s emissions, largely due to the use of fossil fuels in the generation of energy. Government’s intentions have been clear in promising that businesses will be assisted to reduce emissions using tax incentives and savings (Smit, 2009:47). Smit (2009:47) also notes that globally there is a movement towards the exportation of cross-border carbon adjustments. What this means is that carbon-taxing countries (in their attempt to conform to the Kyoto protocol) can levy importation fees on goods manufactured in countries with no taxes on carbon.
Williams (2009:50) points out that South Africa requires legislative changes in order to ensure that business and the government subscribe to the envisioned purpose of the Kyoto Protocol. This is required as South African industry’s perspective is that it considers GDP growth impossible wihout a correlating increase in higher GHG emissions due to an increase in energy consumption.
South Africa is lagging behind in terms of its participation in the CDP, where leading companies do not take the trouble to respond to requests to take part in disclosing their carbon emissions as is envisaged by the Kyoto Protocol, according to Williams (2009:51). In his article, Williams reports his discussion with Johann Scholtz, a partner of Webber Wentzel, who is of the opinion that the low respondence rate is due to the fact that there are no legal enforcable regulations for the disclosure of GHG emissions currently in South Africa. Johann Scholtz was of the opinion that legislative changes forcing disclosure will, however, come into effect in the near future, stating that by 2012 Johann Scholtz envisions disclosure to be mandatory.
South Africa is also lagging behind with the registration of projects under the CDM.
Ferreira (2009:12) notes that although European-based companies, which are obliged by their governments to meet carbon emission reduction targets in terms of the Kyoto Protocol, seek to invest in developing countries such as South Africa to improve their carbon profiles, South Africa has been slow to cash in. Less than 20 South African projects are registered with the CDM as providers of certified carbon set-off credits with only three having issued certificates to date. Davenport (2009:37) estimates the value of the global carbon market to have increased from USD 30
billion in 2006 to an astounding USD 126 billion in 2008. South Africa’s share in this market has stayed constant at only 3%.
At the recent Copenhagen summit, South Africa pledged a reduction of its carbon emissions growth by 42% compared to current levels by 2025, on condition of the financial and technological support of developed countries (Mundy, 2009:1).
Salgado (2009:20) points out that amid the praise that South Africa received for its aggressive target, South Africa is also currently building two new coal-fired power stations, an oil refinery and considers building a new coal-to-liquids plant.
Salgado (2009) states that the targets set are exactly as modelled in the Long-term mitigation scenario (LTMS) which calculated South Africa’s options with regard to emission reduction strategies.
A proposed 42% reduction appears consistent with the “use the market” line, which supports the stimulation of the use of new technologies and sustainable behaviours by imposing certain incentives and environmental taxes. The key driver in the LTMS is the need to impose carbon tax, initially at a level of R140 per ton and then increasing to R750 per ton by 2050. Other drivers include providing incentives for renewable electricity generation, biofuels and solar water heaters.
The message communicated by government is clear: Minister Buyelwa Sonjica has indicated that the DEA will release a climate change Green Paper for public comment in December 2010, while the White Paper is expected in April 2011.
2.4 CONCLUSION
Africa stands to lose most from climate change resulting from unchecked GHG emissions. At the Copenhagen summit held in December 2009, delegates were informed that, among other consequences, Africa faced up to 250 million people being exposed to water stress due to climate change with a 50% decrease in agricultural yields by 2020 if decisive action is not taken to enforce GHG reduction (Business Day, 2009c:5).
With China’s pledge to reduce its GHG emissions by 40 - 45% and the US slowly coming aboard by pledging a modest effective reduction of 3%, international pressure is mounting. The Kyoto Protocol still provides the only mechansim to force rich country signatories to cut emissions.
South Africa has pledged its commitment to the reduction of GHG emissions by 42%
by 2025. Environmental taxes and incentives are a crucial element of the modelling done in the LTMS, which was used as a basis to arrive at the 42% target. As Joubert (2009:5) explains, the outcome of the the Copenhagen summit has been the Copenhagen Accord, which was agreed to by the 192 signatory countries of the UNFCCC. The accord postpones the signing of a strong climate law until the next summit which is to be held in Mexico in December 2010. The accord does, however, impose USD 30 billion from 2010 to 2012 to be provided of which the main contributors are the European Union (USD 10.6 billion), Japan (USD 11 billion) and the US (USD 3.6 billion).
The Kyoto Protocol does not prescribe firm regulations to the global community or South Africa with regard to reduction of GHGs and the protocol does not make provision for disciplinary action if agreed targets are not reached. Furthermore, the protocol only makes provision for targets for the period ending 2012. It is believed that firm, enforcable targets will be set at the Mexico summit and as a consequence countries are gearing towards firm commitments in respect of GHG emissions globally.
Although the Kyoto Protocol is not believed to have much force, developed and developing countries are, however, not only bound to environmental targets by the Kyoto Protocol and the accord as agreed to at the Copenhagen summit. According to Speck and Datta (2009:806-810), the concept of environmental fiscal and taxation reform has been topical for over 15 years in Europe and various European countries have successfully implemented such reforms. Speck and Datta (2009) argue that the reasons for implementation may differ between developing countries (such as South Africa) and developed countries.
If one first investigates the reasons for implementation in developing countries, one needs to take cognisance of major pillars of sustainable development as determined at the 1992 Earth Summit in Rio de Janeiro. These pillars are economic, environmental and social objectives and were reaffirmed at the World Summit on Sustainable Development held in Johannesburg in 2002 as well as through the Millennium Declaration and Millennium Development Goals, in which member nations committed themselves to halving poverty by 2015. One of the major challenges in achieving these goals was identified as being the mobilisation of domestic resources.
In this regard, it is quite clear that the revenue-generating effect of market-based instruments could be used to create additional financial resources for developing countries to alleviate poverty.
The World Bank (2005:iii) recently reaffirmed the Millennium Development Goals as follows: ”To help achieve the MDGs, developing country governments need to raise revenues to invest in schools, healthcare, infrastructure and the environment...[Environmental Fiscal Reform] (EFR) can play an important role in this regard, helping countries raise revenues, while creating incentives that generate environmental benefits and support poverty reduction efforts.”
Although poverty reduction is one of the major goals determined by the Millennium Declaration, solving other major challenges faced by developing countries might solve poverty as an added benefit. So, for example, government spending in environmental infrastructure (such as water supply or sanitation) would improve the poverty situation as the poor are mostly affected by environmental problems.
For developed countries on the other hand, the reasons for implementation of Ecological Tax Reform (ETR) is to reform the national fiscal system by moving away from conventional taxes whereby ‘good’ behaviour, such as labour taxes, is taxed to taxes on ‘bad’ behaviour such as environmental pollution. By giving these very clear price signals, it is hoped that the bahavious of consumers and producers would be influenced and ultimately changed. Another reason for implementation would be the distribution of the tax burden on a fairer basis from a sustainable development and envirnomental perspective. It is believed that a reduction of the tax burden on labour, for example, will lead to an increase in employment thereby alleviating
unemployment as high labour cost is seen as one of the main reasons for unemployment in Europe (Speck & Datta, 2009:809).
It is thus clear that the Kyoto Protocol sets certain standards that need to be achieved by participating countries in terms of GHG emissions. In the next chapter, this study seeks to understand the various economic mechanisms that are available in reaching the Kyoto goals by investigating tax mechanisms as opposed to quantitative mechanisms to achieve the Kyoto goals.
CHAPTER 3
EVALUATION OF DIFFERENT ECONOMIC MECHANISMS IN REACHING THE KYOTO GOALS
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3.1 INTRODUCTION: THE STATUS OF THE KYOTO PROTOCOL
Nordhaus (2005:2) notes that the institutional framework of the Kyoto Protocol has had a considerable effect on the EU’s Emissions Trading Scheme (ETS), which covers almost half of Europe’s carbon dioxide emissions. The protocol covers 30% of global emissions (without any enforcement provisions), whereas the enforceable ETS covers only 8% of global emissions. As the protocol’s set targets expire in 2012, countries are starting to consider alternative policies and approaches especially in the light of increased global pressure.
Nordhaus (2005:5) argues that there are currently only two efficient methods of managing the risks associated with economic public goods, in this instance global warming. These methods are:
• Quantitative limitation – this is the limitation method currently advocated by the Kyoto Protocol and is therefore an agreement that limits emissions by different countries.
• Price or tax mechanisms – this signifies the usage of prices, tariffs or fees to harmonize prices and co-ordinate policies globally.
The price or tax mechanisms are widely viewed as the most effective means of reaching environmental objectives. Bithas (2006:159-161) supports the view of Nordhaus, who disputes claims made by Bazin, Ballet and Touahri (2004:129-134) that environmental taxes stimulate less environmentally friendly behaviours whereby a mere ‘sin tax’ is paid on the environmental damage caused. It is Bazin et al. (2004:129-134) contention that this could induce environmental
degradation and therefore they call for a quantitative limitation policy rather than a price or tax mechanism policy to reduce global warming.
Bithas (2006:160) contends that, through the use of the “polluter pays” principle (where the polluter pays for the damage caused to the detriment of other members of society) the optimisation of the allocation of social resources (including environmental resources) is attained.
Bithas (2006:161) continues to argue that although standards can be adopted in line with the quantitative limitation method, the adoption of standards would not limit environmental welfare thievery as no fine is associated with the contravention of the set standards.
Beder (1996:51-63) contends that quantitative limitation can be used to force the polluter to take note of the costs of its environmental thievery, but that economists are opposed to this method and favour the much harsher method of allowing price mechanisms in the market to enforce the environmental policies.
As this paper seeks to provide further guidance on the ideal mechanisms that can be used to limit environmental degradation it is important to understand the benefits of a price approach versus a quantity approach as explained below and supported by Nordhaus (2005:12-22).
3.2 ADVANTAGES OF A TAX MECHANISM AS OPPOSED TO QUANTITATIVE LIMITATION POLICY
The following are the advantages of a price mechanism policy, which have been mostly overlooked by policy-makers with regard to global warming environmental policy formulation as opposed to a quantitative limitation policy as confirmed by Nordhaus (2005:12-22):
• Quantitative policies such as the Kyoto Protocol do not have a clear economic objective, which would balance the costs and benefits of GHG reductions and ensure that well-formulated economic objectives are met.
Tax mechanisms have identifiable goals, which can be attained and demonstrated through the use of modelling.
• Quantitative policies tend to use a baseline approach (the Kyoto Protocol, for example, uses a baseline of emissions recorded in 1990). This does not include other dynamic variables such as growing economies, technological change and different economic growth for different countries. The Kyoto Protocol based its projections on historical data, which penalises countries which are rapidly growing (such as Korea) and provides an advantage to countries with high 1990 baselines where economical growth has slowed in the intermittent period (such as Ukraine).
Tax mechanisms use a baseline of zero and all countries can be measured against a set standard, instead of different baselines being applied to different countries. Countries would therefore also not be advantaged or disadvantaged by past performance or previous levels of emissions.
• Studies undertaken have shown that price-type regulation is more efficient, due to the structure of the uncertainties where the marginal costs of emissions reductions are highly sensitive while the marginal benefits of emissions are largely invariant to the current level of emission reductions (Hoel & Karp, 2001:91-114).
• Tax mechanisms offer a ‘double burden’ of environmental taxes. If, for example, carbon taxes are imposed and rebated through taxes then the overall loss from taxation will remain unchanged. If restraints are imposed under a quantitative
policy, no such double burden will be imposed and therefore an increase in prices will not be set off against the potential rebates.
• A quantitative policy is largely seen as more susceptible to corruption than tax mechanisms. One of the outflows of a quantitative approach is that it creates an emissions trading system where tradeable emissions permits are allocated to different countries.
The limiting of emissions creates a scarcity where the value of the countries who own permits will rise in line with the economic principle of supply and demand. A case in point is Russia, which owns tens of billions of dollars of tradeable emission permits, currently held in state hands, however, there are reports that inhabitants are seeking ways to ‘privatise’ the owning of these permits.
• A price approach gives less room for corruption as there are no permits transferred and as such, these permits cannot be sold for purposes other than to benefit the environment.
• A quantitative policy is also limited in the fact that there is a great need for transparency and accurate measurement of emissions. If the company selling its emissions permits did not measure the actual emissions reliably (therefore overstating the emissions reduction) and the buyer uses the emissions certificates to offset GHG emissions, there is a risk that the buyer would effectively increase emissions unknowingly.
The need for independent verification is apparent, and seen in the light of the recent lack of independent monitoring evidenced by the accounting scandals experienced in the US the risk of falsification of information is very real.
• Quantitative policies do not take cognisance of the potential disparities already in place where, for example, some countries in Europe have higher carbon taxes. A price approach would accurately eliminate the disparities currently facing global trade by ensuring that a consistent pricing approach is applied.
3.3 THE ADVANTAGES OF A TAX SYSTEMS DIAMATIGRALLY OPPOSED TO QUANTITATIVE POLICIES
Kahn and Franceschi (2006:781) support the view of Nordhaus that a tax or pricing system is the more optimal solution and introduced the following four significant advantages in comparison with a quantitative policy:
• a tax system offers a continuous incentive to reduce emissions even if the tax remains constant;
• a tax system functions as a greater incentive for technological innovation in emissions reduction technologies and therefore stimulates a multi-level solution;
• a tax system offers the small polluters (such as households) an easier inclusion in the tax reform regime through the use of incentive systems;
• a tax system offers a greater likelihood of developing countries (currently excluded from the Kyoto Protocol) participating in environmental reform.
Command and control systems (based on the principles of quantitative policies) tend to exacerbate the costs of controlling emissions due to the fact that they do not provide options for reducing emissions.
On the other hand, tax mechanisms may make it costly for polluters to emit GHGs, but these systems leave them free to choose the most cost-efficient method of reducing pollution.
Creating a never-ending incentive to reduce emissions is an important advantage of a tax system as opposed to a cap-and-trade system. This is due to the fact that technological innovations resulting in a decrease in the cost associated with pollution create very different results for a tax system when compared with a quantitative system as illustrated through the following diagrams:
3.4 ILLUSTRATION OF ENVIRONMENTAL RESPONSES TO A TAXES AND CREDIT SYSTEM
Kahn and Franceschi (2006:781) illustrate the responses to taxes and credit system in their cost:emission function diagram included as figure 3.1. This diagram illustrates that technological innovation of a quantitative system reduces the cost of the marketable pollution permit, however, it has no effect on the level of emissions.
Figure 3.1: Emission responses to tax and credit systems
Source: Adapted from Kahn and Franceschi (2006:781)
Figure 3.1 shows the unregulated emissions depicted by E0 being reduced to E1
using a tax equal to t or marketable permits equal to E1. The price of the permits will therefore lead to costs amounting to P1.
The diagram has been changed to assume that technological advancements occur, thereby reducing the marginal abatement cost curve from MAC1 to MAC2. Therefore the cost of emissions has been reduced dramatically.
Under the tax system, which is driven by the cost axis, equilibrium will be achieved by reducing emissions to the level E2 whereas under the quantitative system, which is driven by the emissions axis, the emissions will remain consistent at E1 as the benefits of the technological advances will lead to a reduction in costs from P1 to P2.
If the advancement in technology leads to lower costs associated with the same levels of emissions, the only option through which emissions will be reduced is through the tax system. If, however, technology is invented to reduce the levels of emissions itself (as illustrated by the broken line) emissions will decrease under a quantitative system, however, not as much as it would under a tax system.
Although technological innovation leads to cost savings under the tax and quantitative systems, a greater cost saving is achieved through the use of the tax system. These cost savings can then be used to reinvest in additional technological advancements in order to stimulate research and development initiatives in cost- and emission-saving technologies.
3.5 CONCLUSION
In arriving at a conclusion on the best mechanism to achieve the Kyoto goals, the following important points have crystallised through the review of the available literature:
1) The Kyoto Protocol, whether it is ratified or unratified, will not significantly slow down global warming. This is due to the fact that it does not encourage emissions reductions for developing countries and it makes no provision for reducing emissions for developed countries below 94% of their 1990 levels.
2) A tax-based system has the potential for providing incentives for reductions in emissions that are needed, giving developing countries an incentive to constrain the growth of emissions without placing a limit on emissions in
absolute terms.
A tax-based system provides developed nations with an incentive to continue to reduce emissions in the future. Furthermore, the advantages of a tax-based system greatly outweigh the advantages of a quantitative system as detailed by the discussion above on the advantages of a tax mechanism as opposed to quantitative limitation policies.
3) As diagrammatically presented, a tax-based system is the only system providing real emission reduction benefits, which are linked closely to technological research and development advances. These advances which
will eventually lead to the perpetual benefit of emission reduction as well as cost saving for polluters.
A study of the available literature proved that a tax-based system is the most efficient manner to provide much-needed benefits associated with emissions reductions.
The contention that a tax-based system is preferable to a quantitative system (cap- and-trade system) was substantiated.
The next chapter investigates the current trends in the environmental tax environment in an attempt to understand which tax mechanisms are currently in use and are available to be tailored to the South African context.
CHAPTER 4
RECENT EXPERIENCE AND TRENDS IN ENVIRONMENTAL TAXES
Ekins (1999:39) points out that the use of environmental taxes and charges in OECD countries increased by over 50% between 1987 and 1994. Relative to overall taxation, revenues generated through the levying of environmental taxes remain small, however, they comprise a rising proportion in most European countries.
Several European countries either have undertaken, or are considering, systematic shifts in taxes away from labour towards the use of environmental resources.
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4.1 CLASSIFYING ENVIRONMENTAL TAXES AND CHARGES
Ekins (1999:42-43) provided the following classification system to discern between the various environmental taxes and charges. This classification system is based on the distinction between the incentive and revenue-raising functions of a tax and between the main uses to which the revenues can be put which are described in more detail below:
4.1.1 Cost-covering charges
Regulating emissions to land or water costs money and in accordance with the
‘polluter pays’ principle it seemed appropriate that the regulation should be paid by the ones that are being regulated. Consequently, the cost-covering charge basis for accounting for environmental taxes was the earliest method of tax that arose from the implementation of the environmental policies. Under this method, the entities making use of the environment also contribute to the costs of monitoring and controlling that use.
Cost-covering charges can take the form of two distinguishable types:
• user charges - where the charge is being paid for a specific environmental service, for example, treatment of waste-water charges;
• earmarked charges - where the revenue from the charge is spent on related environmental services but is not directly linked to a specific service provided to the taxpayer. An example of this type of cost-covering charge is a land remediation charge.
The quantum of the charge is determined by the service it is intended to deliver.
4.1.2 Incentive taxes
An environmental tax can also purely have the purpose of changing an environmental harming behaviour, in which case its sole purpose is not to raise revenue but to serve as a behaviour-changing incentive.
The level of the incentive tax can be determined by two methods:
• the optimal approach - where the marginal damage cost as well as the marginal benefit (therefore the cost of damage and benefit per unit of cause of damage) is determinable, then the level of tax would be optimal at the level where the marginal benefit and the marginal cost are equal;
• the instrumental approach - where the numbers are too uncertain and the marginal damage cost cannot be determined, an incentive tax can be used with other mechanisms to achieve environmental objectives according to other criteria such as environmental sustainability criteria.
4.1.3 Revenue-raising taxes
Environmental taxes that are intended not only to change behaviour but also to yield revenues over and above those required for restitution of the environmental damage caused are termed revenue-raising taxes. Governments generally use these tax forms to shift tax away from fiscal requirements such as high marginal rates of income tax.
These three types of taxes should not be seen as being mutually exclusive, as a revenue-raising charge may have a cost-covering benefit as well; however, there is a two-fold reason for classifying environmental charges in this fashion. This classification method clarifies the main objective of a tax, which may not be consistent for the various categories, and the intention behind the tax can be more clearly identified with the relevant effect on determining the desired level of revenue to be generated.
It is therefore important that the objective of the tax is determined in advance according to this classification matrix in order to determine the choice of what is to be taxed as well as the level of taxation.
This study will now focus in greater detail on the current trends and practices followed specifically in the European Union.
4.2 CURRENT TENDENCIES AND PRACTICES
The current tendencies and practices are discussed in more detail below, which provide a summary of the comprehensive database of environmental taxes and charges in the European Union as well as in Norway and Switzerland as detailed in Ekins (1999:45-52).
The intention of providing this summary is to give the clearest example of a particular tax or charge currently applied in the European Union, Norway and Sweden based on the classification method as provided above:
4.2.1 Cost-covering charges: user charges
The following environmental tax mechanisms are currently being applied:
• Waste-water charges are imposed by most OECD countries for the treatment and disposal of sewage and/or other water-carried effluents. Charges for sewage are mostly based on water usage, whereas the charges on other water-carried effluents are calculated with reference to actual measurements of pollution.